Poor provinces getting too much from equalization

Poor provinces getting too much from equalization

By Daniel McHardie

Two of Canada’s wealthiest provinces are seeing their poorer counterparts surpass them in fiscal strength because of the equalization program’s failure to assess the different costs of delivering public services, according to a new report.

The Atlantic Institute of Market Studies released its paper, “Still more equal than others,” a day after the Atlantic Provinces Economic Council issued a study that says New Brunswick could be shortchanged to the tune of $1.1 billion over 20 years by the equalization program’s reforms.

The AIMS report focuses on the ongoing reticence to calculate how much it actually costs to pay for public services. Bobby O’Keefe, a senior policy analyst at AIMS, said that continued policy blind spot is unfairly boosting the fiscal capacity of poorer provinces.

“Changes made to the equalization program still fail to provide equal access to comparable levels of revenue for poorer provinces,” the report said. “But rather than provide the poorer provinces with too little, as they would argue, it provides too much.”

Equalization is the federal transfer program that aims to divert funds to poorer provinces so they can deliver comparable levels of social services at similar taxation rates as richer jurisdictions. But wages and other basic costs of doing business vary dramatically between the provinces. For example, public services that cost the Ontario government $1,073 will only cost $921 in New Brunswick.

Before equalization, New Brunswick has the second lowest fiscal capacity in the country, ahead of only Prince Edward Island, while Alberta, British Columbia and Ontario are ranked in the top three. Factor in equalization payments and the fiscal capabilities flip around. Alberta is still the nation’s strongest economy but suddenly Ontario is ranked in 10th spot and British Columbia is in eight. Meanwhile, Prince Edward Island surges to second place and New Brunswick moves to fifth.

Finance Minister Victor Boudreau would not comment on the findings until he saw a copy of the document. O’Keefe said the federal government should look at a formula that would pay down the debt of receiving provinces instead of just a direct transfer.

“If the equalization program were to have some type of mechanism that directly helps the provinces with their debt “¦ so instead of just handing over cash to the provinces it paid off debt or paid down debt service charges, that type of program would be more useful than what is happening now,” he said.

New Brunswick pays roughly $607 million annually to service the interest on its $7 billion net debt. The province collects $1.4 billion annually in equalization payments, so O’Keefe admitted that a hybrid system would still need to be adopted, which would allow some additional payments. Considering New Brunswick’s self-sufficiency goal for 2026, the AIMS official doesn’t think the province is in a position to ask for additional equalization dollars.

“To ask for more money to help achieve self-sufficiency seems like a bit of a contradiction to me,” he said.

New Brunswick’s Opposition Leader Jeannot Volpé raised a similar point in question period when he pushed Boudreau for a plan on drawing down on the province’s equalization dependency.

“As a province that should not be a concern because they want out of (equalization),” Volpé said. “They say by 2026 they don’t want any equalization payments, so it shouldn’t be a concern for them.”